Corporate Insolvency and the “Fitter Bidder”

The National Company Law Appellate Tribunal (“NCLAT”) on 14 November, 2018 gave a go – ahead to the revised bid of Ultratech Cement Limited (“Ultratech”) for the acquisition of debt-ridden Binani Cement Limited (“Binani Cement”), while ruling that the resolution plan submitted by the competitor Dalmia Bharat through its group firm Rajputana Properties (“Dalmia group”) did not properly cater to the operational creditors of Binani Cement and was also discriminatory against some ‘financial creditors’ and ‘operational creditors’.

The Tale So Far

In 2017, Bank of Baroda initiated insolvency proceedings against Binani Cement as it defaulted on a debt of its stressed assets including domestic cement capacity of 6.2 metric tonnes per annum (“MTPA”) in Rajasthan and international assets of 5 MTPA. Thereafter, the committee of creditors (“CoC”) approved the bid submitted by the Dalmia group over Ultratech as it was the highest bidder. Earlier this year, the National Company Law Tribunal, Kolkata (“NCLT”) asked the CoC to evaluate the revised bid submitted by Ultratech as it aimed to cover all the financial and operational creditor dues.

Dissatisfied with the order passed by NCLT, the Dalmia group appealed before the NCLAT, which concurred with the decision passed of the NCLT. Thereafter, Dalmia group challenged the NCLAT order in the Supreme Court (“SC”) which refused to interfere in the matter at that stage and referred the case back to NCLAT.

Interpretation of the NCLAT Order

Object of the Insolvency and Bankruptcy Code (“Code”)

To deliberate on the issue of a ‘fitter’ resolution applicant, the NCLAT shed light on the ‘object of the Code’, ‘object of the Resolution’ and ‘expectations from the CoC.’ In this context, it held that the object of the Code is to promote resolution over liquidation. Further, it emphasized on the elements of ‘resolution’ which includes ‘maximization of value of the assets of the corporate debtor’ and ‘promoting entrepreneurship, availability of credit, and balancing the interests’ of all the creditors.

It is pertinent to note that reference was made to the case of Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors, ([2018] 146 CLA 293 (SC)) wherein the Supreme Court observed that every possible effort should be made to find a resolution applicant who can strive to run the corporate debtor as a going concern.

As far as the role of the CoC is concerned, in this case the NCLAT again brought into view the ‘object of the Code’, which aims at:

promoting availability of credit;

balancing the interests of all stakeholders;

The NCLAT, having reasonably construed the statute, further observed that the liabilities of those creditors who are not a part of the ‘CoC’ must also be satisfied, concluding that giving preferential treatment to one type of creditor defeats the objective of the Code. Accordingly, it held that “the dues of operational creditors must get at least similar treatment as compared to the dues of ‘financial creditors”.

Weighing the Resolution Plans

Dalmia Group

While examining the resolution plan submitted by the Dalmia group, the NCLAT observed that while some financial creditors such as ‘Bank of Baroda’, ‘Canara Bank’, and ‘State Bank of India’ had been provided with 100% of their verified claims, other financial creditors including Export Import Bank of India and State Bank of India – Hong Kong had been given lesser percentage of their claims. Arguably, there was no acceptable ground given by the Dalmia group as to why they discriminated against two sets of creditors who were similarly situated as guarantors in this case.

Over and above that, prejudice also prevailed in the case of operational creditors as ‘unrelated parties’ of Binani Cement had been provided with 35% (thirty five percent) of their verified claims, whereas the ‘related parties’ were provided with none.

On this account, it becomes clear that, in the present case, equitable treatment was not even afforded to all the financial and operational creditors by the Dalmia group, which in turn is against the intent of the Code as it does not prescribe differential treatment between similarly situated ‘financial creditors’ or the ‘operational creditors’ on one or other grounds.

Ultratech

The NCLAT observed that the resolution plan, including the revised plan submitted earlier by Ultratech was not properly assessed by the CoC. Accordingly, the NCLAT rejected all the objections placed by the CoC including that the revised resolution plan was ‘not in accordance with the process document’ and ‘beyond the time stipulated under the I&B Code’ and held that the revised resolution plan submitted by Ultratech was well within time and met all the requirements as prescribed the Code.[1] It further held that the CoC is entitled to modify and negotiate the resolution plan with the approval of the resolution professional and for its implementation there is no other time limit prescribed, except that the resolution process should be completed within a stipulated period of 180 days or maximum 270 days.

Interpreting the resolution plan submitted by Ultratech, the NCLAT observed that both the financial and operational creditors were to be paid 100% of their dues. In addition to that, working capital has also been agreed to be infused by Ultratech for the optimization of assets. Accordingly, the NCLAT held that not only Ultratech has taken care of maximisation of value, but it has also struck a balance between all the stakeholders of Binani Cement.

Ultratech- the ‘Fitter Bidder’

It is pertinent to note that after the directions through the NCLT order, the members of the CoC had unanimously voted in favour of the revised plan submitted by Ultratech. Based on the aforementioned observations, the NCLAT held that the resolution plan submitted by the Dalmia group was discriminatory in nature, and was thus against the object of the Code. Hence, it approved the revised ‘resolution plan’ submitted by Ultratech as it catered to the interests of all the stakeholders and was found to be a ‘fitter bidder’.

Conclusion

In my view, this ruling effectively brings to light what was being completely omitted, i.e. the very purpose of the Code – ‘maximisation of values to ensure least haircut to various set of creditors’ and ‘balance of all the stakeholders’. This laudable order passed by the NCLAT upholds the view of reviving an entity with a solution which is both legally and morally correct in view of the stakeholders and economically efficient.

In the order, the NCLAT has also underlined the features of ‘sale as a going concern’ which is nothing but a gateway to widen the perspective of the Code, and also one of the best tools to maintain continuity of a business. This is indeed appreciated that NCLAT has ensured taking into consideration each and every aspect to enhance the ‘viability of the business.’

However, in my view, transparency in evaluating bids and the adequacy of the resolution professionals’ management expertise still serve as some of the obvious shortcomings of the Code, which in turn leads to time-consuming frivolous litigation, undermining the very intent of the Code. Nevertheless, this ruling sets a strong precedent for cases where the bids made after the deadline prescribed under process document can be accepted by the CoC if it entertains the interest of all stakeholders and amplifies the value of a corporate debtor.

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1 comment

It is a good analysis. Few other questions arise:
1. Impact on Essar steel. Need to wait till the SC rules on it.
2. Moral of the story is give at-least equal to the admitted claims, to prevent some one else walking away with the cake.
3. What is not clear: Can some one give more than the admitted claims of the creditors., ie agree to pay some money to the share holders… not clear whether share holders and current owners can figure in as creditors against the company in the current scheme.
4. Accounting for the share capital of the company: shares held by the promoters as well as those traded?
How does the transfer of ownership actually take place to the new owner?
5. The current scheme clearly has a bias against operational creditors

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